Spain's banks have $76 billion capital deficit in stress test

Spanish banks test better than expected

Spain’s banks have a capital deficit of 59.3 billion euros ($76.3 billion), less than previously estimated, according to a test designed to lift doubts about a financial industry hit by real estate losses.

The Bankia group, a nationalized lender, had a 24.7 billion-euro capital deficit in the tests conducted by management consultants Oliver Wyman that also showed Banco Popular Espanol SA had a 3.22 billion-euro shortfall. The stress tests of 14 lenders showed no capital deficit for seven banks, including Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Sabadell SA, the Bank of Spain and Economy Ministry said in a joint statement today.

Spain commissioned the independent stress test as part of the conditions agreed in July for a European bailout of as much as 100 billion euros for its banking system, which has been saddled with more than 180 billion euros of losses linked to souring real estate assets. The attempt to show how its banks would bear an extreme scenario in which the economy would shrink for three years in a row is part of the government’s drive to show it is fixing Spain’s economy as it considers whether to seek a further rescue package from Europe.

“These are important stepping stones on the way for Spain,” said Holger Schmieding, chief economist at Berenberg Bank in London, referring to the test. Still “there will always be people in the market who question the numbers,” he said.

Shortfalls, Surpluses

The total capital deficit is less than the 62 billion euros Oliver Wyman estimated in June that banks would need. The 59.3 billion-euro shortfall number doesn’t take into account merger processes already underway and deferred tax assets, the joint statement said. When mergers and tax effects are accounted for, the amount is 53.7 billion euros, it said.

In its worst-case scenario, Oliver Wyman said it assumed a real decline in gross domestic product of 4.1 percent in 2012, 2.1 percent in 2013 and 0.3 percent in 2014, and estimated that unemployment would keep rising to 27.2 percent in two years’ time. The tests factored in Spanish 10-year debt yields of 7.4 percent this year and 7.7 percent in 2013 and 2014.

The seven banks with capital deficits in the adverse scenario also include the nationalized lenders Catalunyabank and NCG Banco, with a 10.8 billion-euro and 7.2 billion-euro shortfall respectively, the statement said.